These 4 areas in Corporate Lending are ripe for transformation today

With more than a year into the pandemic, it's safe to say that the world of corporate banking has been rocked by an unexpected convergence of epic events. Events that have exposed critical pain points for both Corporate Banks and their clients. And coporate finance is no exception - here's how it's getting impacted:

• The impending shift away from LIBOR (London Interbank Offered Rate) will bring with it sweeping changes in banking operations.

• New requirements within banks aimed at improving efficiencies in the corporate lending and credit process.

• Changing customer expectations that mirror consumer attitudes broadly.

• A proliferation of economic stimulus plans in response to the COVID-19 pandemic.

LIBOR underpins trillions in bank-to-bank borrowing worldwide, and while the shift away has now been pushed to 2023, banks must start thinking about transitioning to other risk-free rates (RFRs). The sheer volume and value of outstanding contracts, as well as the need to modify existing systems and processes to accommodate new RFRs, portend a very disruptive transition away from LIBOR.

Unlike LIBOR, there are no term rates for new RFRs which require lenders to modify existing systems/processes to accommodate new RFRs. RFRs bring new conventions/changes in accrual processes and rate fixing methods which are quite different from what is being used today.

The COVID-19 pandemic has further complicated the transition of LIBOR to alternative benchmarks and will impact migration timelines. Given the complex nature of changes and impact across different asset classes and instruments, banks must approach this change in strategic rather than a tactical way keeping the long-term implications in mind.

Meanwhile, corporates are seeking simplified relationships with their banking partners; end-to-end, real-time data; and digital capabilities. More than half of corporate banking clients say they're reviewing relationships with their main banks, according to the 2019 Global Treasurer's Banking Transaction Survey.

The majority of corporate banks grapple with similar problems. When banks expanded their corporate lending business to cover multiple segments and geographical areas in response to changing customer demand nearly three decades ago, each division/geography had its own set of requirements and procured a system to meet individual needs. The systems were specialized―with some catering to origination functions while others were adept at loan processing. This created a bottleneck between the front and back-office systems, taking months for loan processing and leaving limited visibility for the borrower and banker alike.

Banks are moving swiftly to correct this disparity―and an integrated front-to-back corporate lending system can help reduce processing time to days with enough processing and workflow flexibility for a variety of loans. This eliminates the need for specialized/regional systems and provides a single integrated view of loan book to the banker.

Besides, banks are navigating their crucial role in managing the emergency financial response to COVID-19, as well as a massive influx of credit decisions. They may report application volumes that are five to eight times greater than normal. Banks must protect their corporate lending books, and they must prepare to manage additional stimulus programs.

Digitization of banking is creating new avenues for growth—and banks are looking to modernize their corporate credit/corporate lending functions for higher growth, improved efficiency, and better customer service. But most of the digitization effort is on the origination side rather than improving internal banking functions/processing platform. While this has worked in the past, the competitive edge of banks is declining dramatically against a nimble digital competitor.

It's becoming increasingly clear that many corporate lending platforms aren't up to the expected and unanticipated challenges of today's market and customer realities. New levels of digital transformation―encompassing automation, integration, and intelligence―can help banks transform their operations to respond to market needs and customer expectations.

These areas of corporate lending are especially ripe for digital transformation:

1. Loan origination:

Most banks, large and small, have invested in a loan origination system (LOS) as a first step toward digitizing the customer journey. Still, most LOS cannot deliver a completely digital system for all loans, and most cannot handle loan servicing. Banks should ask whether the "digital skins" adopted over the last few years are enough to overcome their current challenges― especially as customers seek no-touch banking services because of the pandemic.

2. Credit risk management: 

Though regulators have eased capital requirements, allowing banks to fully use their buffer capital, managing the effects of the economic crisis on credit risks and capital levels is a top priority for every bank. In cases where existing models cannot effectively risk rate new products, banks may have to factor in new models. Banks may also need to rewire their credit risk monitoring systems to make them more responsive to the current crisis. A configurable, enterprise-wide risk management system, which enables business rule definition and brings together risk aspects for a given exposure, will help banks view risk holistically and leapfrog over the competition.

3. Integrated credit:

Typically, credit information and associated credit ratings vary significantly across business lines and are maintained in silos. Globally, banks are undertaking enterprise credit management systems to aggregate credit information and make it available via various dashboards. As loan applications surge due to the COVID-19 crisis, banks need to build eligibility criteria into the credit assessment for government-backed programs. They may also need to extend automated credit decision-making to as many applications as possible so that credit underwriting teams can focus on exceptions and higher-risk cases. An enterprise credit management system, integrated with the lending system, improves due diligence performance and lowers risk.

4. Loan servicing:

Corporate loan servicing requires complex workflows related to customer service, accounting, risk management, reporting, and more. Lack of automation means the process is typically labor-intensive, costly, and error-prone, factors that can inhibit scale and erode loan-portfolio quality. If the integrated credit function can support loan servicing, it can deliver improved customer service and even trigger early warning indicators for deteriorating credit quality.

To truly transform the corporate lending experience for bankers and corporates alike, today's financial institutions require a single digital platform to manage the entire corporate lending lifecycle―spanning origination, credit and servicing. A next-gen solution must include a high degree of automation and configurability to adapt to each firm and the client's unique needs. As necessary, it must deliver all the information relationship managers, credit analysts and underwriters need about their clients in a dashboard available on traditional and mobile devices.

Also, transformative technologies play a growing role:

• Analytics—a key differentiator in enhancing the credit portfolio and enabling an end-to-end digital experience. Analytics can speed decisioning by helping credit analysts assess client performance and health and by helping to automate corporate lending decisions meeting specific criteria.

• Artificial intelligence (AI) and machine learning (ML)—smart decision engines developed using ML/AI tools help credit teams choose the best strategy for specific clusters, behaviors and expected performance.

• Robotic process automation (RPA) and ML—enables automation of repetitive tasks, such as data entry for drawdown notices, freeing valuable resources.

• Support for blockchain—employed in a closed group of lenders and borrowers, blockchain can lend much-needed speed and transparency to the corporate lending process.

Digitization is creating new avenues for banks' growth, improving customer service, and creating efficiencies in bank operations. A new-generation lending platform enables standard processes across all loans, and it brings together all stakeholders on the same system, improving workflows and transparency—and enabling remote work during the COVID-19 pandemic. Digitization helps banks quickly roll out new products and enhancements for their corporate clients, strengthening relationships, while driving new levels of efficiency and risk management.